Question

Consider an asset that costs \$501,600 and is depreciated straight-line to zero over its 9-year tax...

 Consider an asset that costs \$501,600 and is depreciated straight-line to zero over its 9-year tax life. The asset is to be used in a 3-year project; at the end of the project, the asset can be sold for \$62,700.

 Required : If the relevant tax rate is 35 percent, what is the aftertax cash flow from the sale of this asset? (Do not round your intermediate calculations.)

\$157,795.00

\$165,684.75

\$149,905.25

\$40,755.00

\$1,138,017.00

Cost of Asset = \$501,600
Useful Life = 9 years

Annual Depreciation = Initial Investment / Useful Life
Annual Depreciation = \$501,600 / 9
Annual Depreciation = \$55,733.333

Depreciation for 3 years = 3 * Annual Depreciation
Depreciation for 3 years = 3 * \$55,733.333
Depreciation for 3 years = \$167,200

Book Value at the end of 3 years = Cost of Asset - Depreciation for 3 years
Book Value at the end of 3 years = \$501,600 - \$167,200
Book Value at the end of 3 years = \$334,400

Salvage Value = \$62,700

After-tax Salvage Value = Salvage Value - (Salvage Value - Book Value) * Tax Rate
After-tax Salvage Value = \$62,700 - (\$62,700 - \$334,400) * 0.35
After-tax Salvage Value = \$62,700 + \$95,095
After-tax Salvage Value = \$157,795.00

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